management

Most businesses today believe that technology can dramatically improve the way they operate. But they embrace technology with varying levels of enthusiasm.

The lowest level of enthusiasm is to adopt technologies made by other companies – email, customer services software, etc – and perhaps create an “IT department” to manage those technologies but nothing more. The next level of enthusiasm is to create an internal technology organization – a senior executive position like a CTO, a technology department, etc – and develop proprietary software. The highest level of enthusiasm is to have top management with technology backgrounds who see technology as core to every organizational function. For them, having a technology department would be like having a business department – redundant and strange.

A lot of recent Silicon Valley startups look at first glance like non-technology companies, doing things like food delivery, home services, transportation, etc. The difference is that the founders often grew up with technology, have backgrounds developing software, and can’t imagine anything other then a technology-centric worldview. They’re betting that by putting technology at the core, they’ll be able to create dramatically better products and services.

“Agency problems” are what economists call situations where a person’s interests diverge from his or her firm’s interests.

Large companies are in a constant state of agency crisis. A primary role of senior management is to counter agency problems through organizational structures and incentive systems. For example, most big companies divide themselves into de facto smaller companies by creating business units with their own P&L or similar metric upon which they are judged. (Apple is a striking counterexample: I once pitched Apple on a technology that could increase the number of iTunes downloads. I was told “nobody optimizes that. The only number we optimize here is P&L in the CFO’s office”).

If you are selling technology to large companies, you need to understand the incentives of the decision makers. As you go higher in the organization, the incentives are more aligned with the firm’s incentives. But knowledge and authority over operations often reside at lower levels. Deciding what level to target involves nuanced trade offs. Good sales people understand how to navigate these trade offs and shepherd a sale. The complexity and counter-intuitiveness of this task is why it’s so difficult for inexperienced entrepreneurs to sell to large companies.

Agency problems also exist in startups, although they tend to be far less dramatic than at big companies. Simply having fewer people means everyone is, as they say in programming, “closer to the metal”. The emphasis on equity compensation also helps. But there are still issues. Some CEOs are more interested in saying they are CEOs at parties than in the day-to-day grind of building a successful company. Some designers are focused on building their portfolio. Some developers are only interested in intellectually stimulating projects. Every job has its own siren song.

One of the reasons The Wire is such a great TV show is that it shows in realistic and persuasive detail how agency problems in large organizations consistently thwart well intentioned individual efforts. The depressing conclusion is that our major civic institutions are doomed to fail. Those of us who are technology optimists counter that the internet allows new networks to be created that eliminate the need for large organizations and their accompanying agency problems. Ideally, those networks recreate the power of large organizations but operate in concert like startups.

“The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” – F. Scott Fitzgerald

One reason running a startup is so interesting is the constant tension between opposing ways of thinking: short-term vs. long-term, internal vs. external, saving vs. investment, etc. At large companies, responsibility for these ways of thinking is often spread across multiple business units. In startups they fall on a few people, usually the founders.

As a founder, the most important tension is between your capabilities and sensibilities. Capabilities are your talents and resources. Sensibilities are the way you see the world. Successful founders usually have an unlikely combination of capabilities and sensibilities. The right sensibilities without the right capabilities means a good vision, poorly executed. The right capabilities without the right sensibilities means building something your market doesn’t want. Getting both right creates founder-market fit.

There are advantages and disadvantages to being an experienced entrepreneur. Disadvantages include the fact that, with age, you are more likely to have obligations outside of your startup. You also risk having calcified sensibilities. Counterbalancing this is greater self-awareness, and, ideally, the wisdom to choose markets that match your sensibilities and cofounders who augment your capabilities.

Firing is awful. You can try to avoid it, but even the most selective founders make serious mistakes. Here are a few things I’ve observed about firing:

1) The good people bounce up, the bad ones bounce down. I was told this by my boss once when he was firing one of my friends. At the time, I thought this just made him feel better about himself. Over time, I’ve seen the wisdom in what he said. Some people who get fired react by fixing their weaknesses. Others spiral down.

2) Do it early. If you think you’re going to fire someone over the next six months, you probably will. Don’t wait too long. Too many founders do. It’s better for management and employees if it happens fast.

3) It’s awful. You’re in control of a situation that will meaningfully hurt someone. It’s an awful place to be. The fired person will go home and tell his/her family about how terrible it was. It was your fault. Perhaps your mismanagement caused it. Who knows. You’ll question it, and perhaps you are right to do so.

4) The other choice is firing everyone. You’re the founder of the company. If you run out of money, you’re forced to fire everyone. If you don’t fire the bad employees, you risk everyone else’s jobs. It’s an impossible situation.

5) The feeling is more likely to be mutual than you think. Most of the time, the person getting fired was already about to quit. The antipathy you feel is likely reciprocated. It’s surprising how often this happens and management doesn’t see it coming.

It would be great if startups were all about growth, hiring, and success. But the reality is that founding a company is a brutal job and lots of the pain gets passed down to employees. Creative destruction sounds nice in textbooks, but in the real world it means telling friends to go home, stop getting paid, and find new jobs.